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Antitrust Lessons from Oil Giants’ Proposed Merger

In perhaps an unsurprising move, last week the U.S. Department of Justice filed a civil antitrust lawsuit challenging the merger of Halliburton and Baker Hughes, the first and third largest oilfield services companies in the United States and the world.  The DOJ alleges the transaction would threaten to “eliminate competition, raise prices and reduce innovation in the oilfield services industry.

In its press release, the DOJ identified ten markets where the merger would create overwhelming market share dominance, with over 50% of each market in its grasp, and twenty-three markets that would now be a duopoly.  Indeed the potential for market dominance led Mr. Bill Baer, the DOJ’s antitrust chief, to comment: “I have seen a lot of problematic mergers in my time[,] [b]ut I have never seen one that poses so many antitrust problems in so many markets.”

The lawsuit, even if successful in stopping the merger, could still cause a shift in the market through a transfer of wealth.  Knowing there was significant antitrust risk in this merger, Baker Hughes extracted several promises from Halliburton to make the deal more appealing: (1) a premium on the price of Baker Hughes’ shares, (2) a commitment to divest assets representing up to $7.5 billion in sales, and (3) a reverse breakup fee payment to Baker Hughes of $3.5 billion if the merger cannot be completed.

Since Baker Hughes’ market capitalization is $20.39 billion, the reverse breakup fee payment represents over 17% of its total worth.  Such a transfer of wealth could have serious effects on these two competitors.  One analyst compared such a transaction to Sprint’s failed takeovers of T-Mobile.  After twice receiving Sprint’s breakup fees, T-Mobile is now the “fastest-growing mobile company in the world.”  Baker Hughes could similarly make good use of an additional $3.5 billion and change the oilfield services market, in which it currently is third largest in the world.